Will The U.S. Push Venezuela Into The Abyss?

Venezuela’s President Nicolas Maduro claimed victory in a low-turnout election that is widely viewed as rigged, raising the threat of more painful sanctions from the United States. But, in a bit of irony, Venezuela’s economy is in such terrible shape, and its oil production falling so fast, that Washington might be afraid of inflicting too much pain on the South American nation.

Maduro won 68 percent of the vote, but turnout was a fraction of previous elections as large segments of the opposition boycotted the election. The Lima Group, a group of 14 countries in the Americas, stated that it would not recognize the election results and the members said they would downgrade diplomatic relations with Venezuela in response to the sham vote.

Now, Washington is considering its next move to isolate Maduro, which could have massive ramifications for the oil market.

“Further starved of funds from the likely intensification of U.S. sanctions after what will be seen internationally as a flawed election, and the continued decline in oil production, it will be increasingly difficult to buy support through patronage,” Exotix Capital said in a note. “At some point, elements of the ruling PSUV party (moderates or hardliners) and/or military could seek to remove Maduro (either through persuasion or force), but it is impossible to predict when such a turning point could come.”

The Trump administration slapped new sanctions on the Maduro regime on Monday, barring U.S. companies or citizens from buying debt from the Venezuelan government, PDVSA or the Venezuelan central bank.

However, the move stopped short of the far-reaching sanctions under consideration that would have targeted Venezuela’s oil sector. Several options to punish Caracas for the unfair election are being considered, ranging from a ban on importing crude from Venezuela to a prohibition on U.S. exports of diluent and light oil to Venezuela, which would hamper processing capabilities.

Those more damaging measures are on hold for now, as the disaster unfolding in Venezuela is way worse than most analysts had predicted it would be at this point. Venezuela’s oil production is falling off of a cliff, the humanitarian crisis continues to deteriorate, and creditors are now seizing assets in the country, which could accelerate and magnify the crisis. U.S. officials are likely wary of pushing Venezuela into the abyss, although the nation will surely continue to crumble even if the U.S. pulls its punches.

The timing is also not fortuitous for the Trump administration to target Venezuela’s oil sector. The oil market is sharply tighter than most mainstream analysts predicted it would be at this point, in part because of the losses from Venezuela. Oil prices are at their highest level in more than three years.

More importantly from Washington’s perspective is the Trump administration’s confrontation with Iran. Secretary of State Mike Pompeo gave a belligerent speech on Monday, threatening to impose the “strongest sanctions in history” if Iran doesn’t submit to all the Trump administration’s demands. Because there is almost no chance Iran will comply, the two countries are on a path of ever-increasing escalation. That could put a sizable portion of Iran’s oil supply at risk – with estimates ranging from 500,000 to 1 million barrels per day.

Iran is a much higher priority than Venezuela for the Trump administration. And because a confrontational path with both countries might not be politically possible because it could send oil prices skyrocketing, Maduro might get a pass.

A ban on Venezuelan oil imports is “off the table now,” according to Francisco Monaldi of Rice University’s Baker Institute for Public Policy. "Partly because the collapse of the Venezuelan oil sector makes it almost unnecessary, partly because with the price of oil going up and elections in the U.S they do not want the domestic backlash, partly because the Iran sanctions make it less timely," Monaldi said, according to S&P Global Platts.

Venezuela’s oil output stands just a bit above 1.4 million barrels per day (mb/d), down more than 500,000 bpd from a year earlier and over 1 mb/d since the end of 2015. By all accounts, the losses will continue, and some analysts say output could dip below 1 mb/d before the year is out. Monaldi, in a separate interview with Bloomberg, said that Venezuela’s PDVSA only has two options left: a political deal with the U.S. that avoids a wave of creditor actions, or to “give up the U.S. and European markets entirely."

There are vanishingly few scenarios that don’t lead to steep and ongoing declines in Venezuela’s oil production.

In fact, Venezuela’s declining output is becoming so severe that OPEC is apparently discussing the possibility of making changes to its production limits at the June meeting. “Maybe, if the market is tight, there will be a need to make some adjustment,” one OPEC delegate who declined to be identified, told Reuters.